Margaret Thatcher changed the UK, but not in quite the way she might have envisaged, writes Deborah Orr. Photograph: Peter Macdiarmid/Getty Images

Margaret Thatcher's funeral was absolutely perfect, especially if, like me, you're a keen student of irony. The magnitude of the occasion paid testament to Thatcher's significance as a leader. She really did change Britain, and that was acknowledged. Yet the fact that she went out in a blaze of public subsidy, union flag draped over her coffin, paid testament to the fact that she did not change the nation in quite the way she might have envisaged. Thatcher sought to maintain the state's political power, but devolve its economic responsibility. Her body was wheeled through the streets in a nation where political power has been devolved, while Westminster continues to struggle to work out how to manage its economic responsibilities effectively.

It's important never to forget the three words that became synonymous with Thatcher's election victory in 1979: "Labour isn't working". This, of course, referred to the dole queues that had been growing ever longer in Britain during the 1970s. When Thatcher came to power, around a million people were unemployed, and the Conservative argument appeared to be that this was the fault of the government.

Punitive taxation of the wealthy, too much effort to please insatiable unions and state ownership of industries with high profit-making potential were diagnosed as the reasons why jobs were disappearing. Much of this was swept away, never to return (unless you count a brief recent period in which the higher rate of taxation went up to 50%). Yet these changes didn't stop the spread of mass unemployment. On the contrary, they accelerated it. Those changes – all on the sacred Thatcherite list of innovations that brought economic renewal to Britain – did not arrest the problem that Thatcher herself had singled out as the most visible symptom of Britain's ailments. Far from it.

Nevertheless, economic renewal, of a sort, did come. Released from the burden of high taxation, the better-off suddenly had much more money to spend. The 1980s became the designer decade, as the rich began consuming conspicuously – and "lifestyle" became important. Yet, those who had lost their jobs were in no position to start fashion lines, open restaurants or market such ventures in the burgeoning and quickly commercialising media. In the south-east, some found employment in the exploding financial services industry, either as a part of it, or as workers servicing the wealthy individuals it was creating. If you had the skills, talent or geographical propinquity, you were in luck. But this wasn't economic renewal. It was economic reinvention. The significance of this cannot be overstated. Thatcher completely reconfigured Britain's economic model. She did change Britain. Crucially, however, those who were made unemployed by the hugely accelerated decline of old industries were, in millions of individual cases, unable to gain employment in the new industries.

The appalling dereliction of the Conservatives was not in failing to foresee this problem. It was in failing to recognise that this painful disconnect between the country's population and the country's economy had occurred. The unemployed, rather than being viewed sympathetically, as people whose futures had been disrupted by economic forces far beyond their control, were viewed contemptuously, as too stubborn and lazy to adapt – the pathetic architects of their own misfortune.

How can it be that Thatcher and Thatcherism are wholly responsible for the positive aspects of Britain's economic transformation – as evinced by the fact that her death was an historic event – and not responsible for the negative aspects? How can intelligent adults persuade themselves that unemployment is the result of welfare dependency, when it was unemployment that came first? The idea, in Thatcher's Britain, was that those millions would start to find themselves jobs, once they were desperate enough. The feckless would not be provided with subsidised housing, decent state education or reliable health services. That would get them off their bums.

Supporters of Thatcher, keepers of her flame, insist that Britain's current economic woes are the fault of Labour. Yet, neither Blair's long government nor Brown's short one sought to change the trajectory of the new economy that Thatcher had wrought. All they did was try to ameliorate the abject condition into which those displaced by it had fallen, like a bunch of trendy vicars.

So Labour spent the money generated by the new model on administering to the casualties of the old model's passing. I'd have liked to have seen Labour win intellectual arguments; I'd have liked to have seen Labour persuading the beneficiaries of this new model that their prosperity had been paid for in terrible, lasting human consequences, that could only be addressed with the understanding and co-operation of the winners. Instead, all Labour did was illustrate how expensive it is to hide decline, even as they let it continue. Manufacturing shrank more under Labour than it did under the Tories. Inequality increased. At no point was a sober assessment of what had gone right under Thatcherism – and what had gone wrong – ever agreed, let alone acted upon.

This week it was confirmed that the number of unemployed people in Britain stands at 2.56 million. (I dread to think how large this figure would be, in comparison to 1979, if the figures were still calculated in the same way.) These statistics are an embarrassment and a difficulty for the government. But they are far more consequential for the people behind the statistics.

Osborne wept at Thatcher's funeral. I doubt his tears were for all of the people he had failed to provide jobs for, having promised that pruning the public sector would cause jobs to sprout in the private sector, just as pruning dead wood off a rose causes blooms to multiply. And that's the real tragedy of Thatcherism. Its successes remain too contested for its enthusiasts, even now, to get off the defensive and admit that it wasn't all good.

I hope that the funeral, despite all its contradictions and ironies, can be seen by Thatcherism's supporters as an acknowledgement, however muted and grudging, that she brought about change so fundamental that it would be ludicrous to argue that it was somehow puny enough to be derailed by Blair and Brown.

You don't starve people into becoming entrepreneurs. You don't even starve them into being upstanding citizens. You just starve them into submission. Welfare dependency is submission to an economic model that shrugs at mass unemployment and says it's a fact of life. That model is Thatcherism, and a recognition of all aspects of its enormous legacy is long overdue.

Thatcherism left Britain politically, economically and regionally divided, a state that was meant to be proud that it stood for something in the world again, even as Thatcherism warned that the state was the enemy of freedom and not to be relied upon. No one could bring in change of the shape, speed and size that Thatcher did, and not expect any flaws or problems to emerge. To say that she's responsible for the country's recent triumphs, but not for any of its woes, defies all logic.